2017 AE review will ignore adequacy but include charge cap

The review will address issues with coverage for the self-employed and those with several employers, but the announcement made no mention of widespread concerns over adequacy at current planned contribution levels.

Pensions minister Richard Harrington also announced that the auto-enrolment trigger will be frozen at £10,000 for the 2017-18 tax year, and only slightly increased the qualifying earnings lower band to £5,876 from £5,824.

It’s difficult to really move the needle where people hadn’t saved for 20 years

Tim Gosling, PLSA

Confirming the scope of the review, he praised auto-enrolment, which saw the number of people enrolled pass 7m on Tuesday, as a “great success, to date”.

“It will give around 11m people the opportunity to save into a workplace pension and we expect this to lead to around 10m people newly saving or saving more by 2018, generating around £17bn a year more in workplace pension saving by 2019-20,” he said in a statement.

No scope for adequacy questions

With contributions still at two per cent of pensionable earnings, the 2017 review, which is required by law, was always going to be too early to judge the impact of raising contributions on opt-out rates.

Despite this, some industry figures voiced displeasure at the minister’s inaction on contribution rates, particularly given the Pension and Lifetime Savings Association's recent finding that the 8 per cent contribution rate will fail 97 per cent of DC-reliant savers.

“I was rather disappointed that they don’t seem to be looking at contribution levels,” said Malcolm McLean, senior consultant at Barnett Waddingham. “If they aren’t going to start looking at this until 2019 that means that it’s going to be 2021 until anything happens.”

But others urged the government to exercise patience in its policymaking, so as not to upset the progress already made with auto-enrolment.

“While most agree the current levels are not enough to provide a decent income in retirement, raising the minimum too far, too fast could be counterproductive if it provokes a surge in the number of people quitting their workplace scheme,” said Tom Selby, senior analyst at investment platform AJ Bell.

“Auto-escalation, which has proved successful in boosting contribution rates in the US, could be an attractive alternative for policymakers keen to boost retirement saving,” he added.

Tim Gosling, DC policy lead at the PLSA, said he agreed, arguing that achieving good outcomes for millennials should be prioritised over a quick fix for underprepared members of older generations.

The PLSA’s retirement income adequacy report previously showed that even raising contributions to 12 per cent, removing the qualifying earnings bracket, and raising the state pension age would not be enough to improve chances of reaching adequate retirement income for most DC savers in Generation X.

“It’s difficult to really move the needle where people hadn’t saved for 20 years,” said Gosling. He also argued for the creation of an independent pensions commission.

Charge cap could come down

The review will reconsider the charge cap on default DC funds, which currently sits at 75 basis points, while competitive charging has centred in the region of 50bp.

The inclusion came as a surprise to Gosling, who said “unanswered questions” remained about whether transaction costs should be included in the charge cap, as this might deter asset managers from making the right decisions.

“What happens if that’s going to put you over the charge cap, even if that’s the right thing for the member?” he asked.

Despite these challenges, Darren Philp, director of policy and market engagement at mastertrust The People’s Pension, said there would be downward pressure on the cap. He also argued for consistent charging between providers.

While many providers charge a single annual fee, others, including Nest, have differing structures.

“There’s nothing necessarily wrong with their charging policies, but how do you compare?” said Philp.

Coverage is key

The review is also set to address issues surrounding coverage, asking whether the self-employed, and those who do not reach the AE threshold in multiple jobs, should be automatically enrolled.

That will be a difficult question to answer, with industry figures expressing mixed reactions to Steve Webb’s recent proposal to increase Class 4 National Insurance Contributions, putting the difference in a pension.

But for Philp, the government missed out on a simple opportunity to increase coverage by scrapping the lower qualifying earnings band, something he described as a “hangover” from pensions in the past.

“Once people are saving, why not make every pound count?” he said.